Bond applicants must accept tougher rates

Many "low-risk" bondholders who were given bonds at anything up to 2 percent below prime before the downturn have not yet realised that it is highly unlikely that they would now be treated the same way.

Rob Lawrence, national manager of Rawson Finance, says consumers forget that prime is just a yardstick that banks use to judge risk, and that the banks' risk has increased commensurably. This means that the price of money, which is a bank's trading commodity, has had to be increased.

"There has been ongoing publicity about the stricter lending criteria, but buyers who now apply for bonds and who are still earning well are understandably very frustrated when they find that their risk rating has been downgraded, and they can get either no discount or a very low discount, such as 0.5 percent on prime.

"The plain truth, however, is that any discount on prime now represents a fairly generous concession on the part of the banks."

He says about 45 percent of average bond applicants will still find their applications rejected, and those who get approval can count themselves lucky if their bonds are awarded at 0.5 percent or 0.75 percent below prime. High-risk applicants - those with poor debt or employment records - may well find themselves paying 1 percent to 2 percent above prime.

Certain jobs, some of which were previously regarded as "safe", and certain industries, have now been rated on risk by the banks.

"For example, any person in construction, the motor trade, in airlines or luxury extra services such as interior decorating, will now find it more difficult to get a bond, as will any person who is self-employed. In fact, self-employed people have never found it more difficult to get a bond, even if they have been earning well for a long time."

So, what can aspirant bondholders do to increase their chances of securing bonds at the best available rate concession?

"Either take the time to shop your financing to each individual bank or use a bond originator," says Lawrence. "Reputable bond originators know the varying criteria and the varying interest rates to which banks work, and they will often be able to secure bonds and at more favourable rates, because they have tried all avenues."

He warns that although it is commendable to build a close relationship with the bank that handles your daily affairs, this should not lead people to expect that it will offer the best bond rates.

"It will always be to the consumers' advantage to find out what the market can offer them, as opposed to looking at one offer.

"If, after shopping around, buyers find that their banks are giving them the best deals, they will then have the peace of mind of knowing this."

Weekend Property supplement (Saturday Argus)

Posted at 09:33AM Aug 16, 2010 by Editor in Home Loans  |  Comments[4]